German investors: the ‘tail that wags that dog’ for market liquidity?

It is a truism to say that homeowners fear rising damp but investors love rising liquidity. In these days when the market on Bay Street is as bone dry as the Gobi Desert in high summer it is encouraging to see a rising tide (to only partially mix a metaphor) in the German markets. The statistics emanating from the Deutsche Börse shed light on why Canadian and, to a lesser extent, Australian companies are brushing up their declensions and trying to fathom the difference between “der, die und das”.

Some Background

It’s strange to think that while mining companies spend so much time and money trying to work out novel ways of tapping previously untapped investors they have had the German investing public almost thrust upon them over the last ten years and yet many companies have never bothered to water the shoots that have appeared in this “foreign” market. In light of the countless hundreds of millions (yes…) of dollars that have been splurged on IR junkets since the start of the commodity super-cycle, I can only presume that many of these companies have not touched ground in Germany and worked the territory because of some primitive fears that they won’t be able to get their message across. Perish the thought that it’s because German cities don’t offer the nightlife and other diversions that executives like to leaven the drear of actually communicating with investors during the day.

Many in the mining community find it hard to believe that listing on German exchanges was (and is) an entirely passive, pain-free and costless exercise with some local broker mentioning a company’s name to one of the German exchanges and “voila!” – listing was achieved with the company knowing about it only weeks or months later. This is a far cry from the very sophisticated, timely and costly shakedown of listed miners that is perpetrated by the ASX and TSX and their varied army of courtesans (lawyers, auditors, registrars and printers) that milk miners to death (literally).

A Rising Tide

After the crash of 2008 things were never quite the same in German markets. Admittedly there had been rips and rorts perpetrated on German investors (mainly by German brokers.. not the miners.. we might add). No matter who was to blame the German investors pulled in their heads and returned to what they knew best, European markets and industrial shares. After a long quiescence, stirrings have appeared over the last year. What is not clear yet to observers is whether the investors are a new generation or they are the investors from pre-2008 who have finally forgotten their war-wounds. This is a relevant question because those from the olden days know quite a lot of the household names of mining whereas a new generation of German investors would be coming to the mining scene without baggage but also without affections (or detestations) for existing players.

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Therefore with a new breed of investors the race will go to the swift amongst miners who go out and do missionary work in the renascent German market for mining equities.

The Hard Numbers

Having a ‘feeling” that things are getting better is not good enough anymore. So here are the stats. First we shall start off with the May numbers for ASX-listed stocks on German Exchanges:

Then TSX listed stocks in May:

The interesting point to note is that the largest TSX stock is turning over ten times the largest ASX stock, even though BHP-Billiton is many times larger in market cap than Barrick.

Then we can look at the numbers for August of last year for the ASX-listed names:

The TSX-listed companies:

And the observation here is that turnover in Canadian listed stocks has made a substantial improvement since August of last year but with not much change in the Australian company volumes. Though we might note the mercurial Lynas featured prominently in August 2014 and had sagged dramatically in the latest month. In the Canadian names Tekmira in non-mining companies was clearly a German favorite last year, driven by its Ebola vaccines. It has since faded out of the top-traded names (surprise!).

Conclusion

The lists of traded miners were truncated to fit them into “at a glance” tables but there are quite literally hundreds of miners from both markets that traded actively in the German markets in recent months. Unless the stock is going from one German investor to another some of these trades must be producing volume back in the home markets as brokers arbitrage between one market and another to supply German demand. That raises the question as to how much WORSE volumes would be in these two markets if it wasn’t for German investors adding to their portfolios. Frankly these statistics make us wonder whether German investors aren’t becoming the (unseen) tail that wags that dog in more than a few mining names of widespread currency.

Comments

merlion

“And the observation here is that turnover in Canadian listed stocks has made a substantial improvement since August of last year but with not much change in the Australian company volumes.”
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The main game in AUS is the North-South lines of longitude.

Free Trade Agreements with China, Korea and Japan summarise the focal points. Singapore is a well-credentialled middle-man ticking all boxes. And then there’s China’s AIIB which Australia signed up to recently.
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“Corporates that aren’t cultivating this market do so at their peril.”

Agree, loudly.

Germany’s Industry 4.0 policies and the 2-week rail shipment time along the Old Silk Road will come into calculation.

Thank you Chris – again a very good article on the German markets and actually something I am trying to educate the Canadian companies about for quite a while.

Just a quick addition to the dual listing process on Frankfurt or one of the other German exchanges. While you are correct that a dual listing sometimes just “happens” it might be a better idea for any interested Canadian company to pro-actively work on getting a dual listing as they will be able to cherry-pick a market maker. Otherwise the Company might end up with a “lower quality” market maker and there is almost no practical way to change this later on.

Another quick comment on your conclusion about German buying creating buying on the Canadian markets:

First of all a lot of the more sophisticated German investors are directly routing their orders to the Canadian exchanges (due to – at least in “normal times” – higher liquidity and a tighter spread). So there might be even more of an impact of the German investors on Canadian companies. Also, as far as I could figure out – there are more and more Canadian brokerage firms or online trading platforms that can give the Canadian investor a direct access to trading on Frankfurt. Therefore not all of the German buying on Frankfurt is reflected on the Frankfurt markets as Canadian investors might be selling into Frankfurt and therefore the Frankfurt market maker might have no or just a smaller short position to cover on the Canadian exchanges at the end of his trading day.

Christopher,
Thanks for the article, it is consistent with what we have experienced after listing in Germany earlier this year. There was no activity for the first few months but lately there is now volume on a daily basis that is trending higher.